Question

in industry a, the largest four firms together have a 30 percent share of the market and there are a total of eight firms in the market. in industry b, the largest four firms together have a 30 percent share of the market and there are 100 other firms in the market. if we want to distinguish between the concentration in these two industries, the best measure to use is the group of answer choices four-firm concentration ratio. horizontal-merger index. vertical-merger index. herfindahl index. none of the above

Answer 1

To distinguish between the concentration in two industries with the same four-firm concentration ratio but a different number of firms, the Herfindahl-Hirschman Index (HHI) should be used as it considers the market share of all firms and provides a more nuanced view of market concentration. Therefore correct option is D

Step-by-step explanation:

When distinguishing between the concentration in two industries where the four-firm concentration ratio is the same, but the total number of firms in the market differs significantly, it's better to use the Herfindahl-Hirschman Index (HHI). The HHI takes into account the market shares of all firms in the market and involves squaring each firm's market share before summing these figures, giving more weight to firms with larger market shares. Considering that Industry A has 8 firms and Industry B has 100 other firms, the HHI would reveal a much different level of concentration than what the identical four-firm concentration ratio indicates.

By using the HHI, we consider not only the largest four firms' market shares but also the impact of the additional firms in the market. This approach provides a more detailed picture of market concentration and competitive dynamics.